SEC Chair Presses for More Funding for Advisor Exams, Enforcement

WASHINGTON -- The head of the Securities and Exchange Commission on Thursday defended the agency's request for a significant budget increase before a House oversight committee, arguing that the additional funding is necessary to equip the SEC with the resources to handle a litany of regulatory tasks, including increased examinations of investment advisors and enforcement actions.

Mary Jo White, who has headed the agency for a little more than a month, said that in her short time on the job she has been struck by "how massive the responsibilities are of the SEC" at a time when the agency is working through the process of writing the rules to implement the Dodd-Frank and JOBS acts, along with other endeavors.

"We very much need what the president has asked for in this budget for fiscal year 2014," White told members of the Financial Services Committee. The "massiveness of our responsibility was what sort of hit me in the eyes in the last month, and I'm very concerned that if we don't get that appropriation that we cannot do our job."

For the 2014 budget, the White House is seeking $1.67 billion for the SEC, a 27% increase over the 2012 level, and 33% over the current funding level, which has been reduced by the across-the-board federal cuts known as the sequester.

Several Republican members of the panel took several jabs at the administration for the unfolding scandal at the Internal Revenue Service concerning the revelation that conservative-leaning groups were targeted with extra scrutiny in their applications for tax-exempt status, with some questioning the SEC's consideration of a rule to require publicly traded companies to disclose corporate political contributions.

But members were generally respectful in their questioning of White, acknowledging the importance of a well-run SEC in protecting investors, ensuring fair markets and spurring capital formation.

Spencer Bachus (R-Ala.), who chaired the Financial Services Committee in the previous Congress, even suggested that it would be "penny-wise and pound-foolish for there not to be some bipartisan agreement for a funding increase," a comment that raised eyebrows from some Democrats on the panel.

White testified that the SEC should be able to avoid employee furloughs under the sequester budget, but that key priorities at the agency will be unmet if the current level of funding holds. White acknowledged that the SEC's budget request comes in response both to the new mandates of recent legislation and an understanding that the agency has been unable to fulfill longstanding obligations, citing the oversight of investment advisors as exhibit A.

"During fiscal year 2012, the SEC was able to examine only about 8% of registered advisors. Significant additional coverage is essential if investors are to be appropriately protected," White said.

The workload at the SEC could be further complicated if the agency moves forward with a proposal to hold broker-dealers to the same fiduciary duty that currently governs the activities of advisors. The SEC put out a call for more input from interested parties on that proposal earlier this year. In her testimony Thursday, White at once affirmed the need for a uniform standard to clarify the landscape for investors, while taking care not to rush to blanket regulations that could eradicate generally legitimate business models and financial services.

"Plainly, what you have seen in the marketplace, and the SEC's gotten data on this, is that retail investors can be confused as to whether they've hired a broker, or an investment advisor and don't realize the standards may be different," White said. "You obviously want to be very careful to protect those interests. On the other hand, you also want to take into account the different business models and to make an optimal decision."

The question of cost-benefit analysis in the SEC's work is set to come up for debate on the House floor tomorrow, as the lower chamber plans to consider the SEC Regulatory Accountability Act, a measure that would require the agency to conduct cost-benefit analyses before it proceeds with new rulemaking proceedings. Additionally, and of great concern to critics, the bill would require the SEC to conduct subsequent reviews evaluating the burden and benefits of rules one year after they are promulgated, and then again at five-year intervals going forward.

Groups such as the Financial Services Institute are backing the measure, with Dale Brown, the organization's president and CEO, writing in a letter to House leaders on Thursday urging passage of the bill, which he said would "ensure only necessary and economically viable rules are promulgated."

White is not so sure. Asked about the impact of the legislation, she quickly noted her strong belief in rigorous economic analysis to gauge the effect of any proposed regulation, but warned that placing SEC rules under more-or-less ongoing review would have the perverse effect of creating new uncertainties for market players.

"I do have concerns about this bill in terms of our ability to carry out our rulemaking function expeditiously and provide market participants with certainty," White said, warning that the bill could "create a lot of litigation that I think would undermine our ability to do our job."